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Reporting & Analyzing Merchandising Operations. Chapter 4. Merchandising Activities. Merchandise Consists of products that a company acquires to resell to customers Retailer Is an intermediary that buys products from manufacturers and wholesalers. Income Statement.
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Merchandising Activities • Merchandise • Consists of products that a company acquires to resell to customers • Retailer • Is an intermediary that buys products from manufacturers and wholesalers
Income Statement • Net sales = (Sales – sales return) • Less Cost of goods sold • Gross profit • Less expenses • Net income
Cost of goods sold Is the cost of merchandise sold to customers during a period. Largest single expense on a merchandiser’s income statement Inventory Refers to products a company owns and expects to sell in its normal operations Assets Inventory Systems
Perpetual system Continually updates accounting records for merchandising transactions Periodic Inventory system Updates the accounting records for merchandise transactions only at the end of a period. Inventory Systems
Accounting for Merchandising Purchases • Merchandise inventory – • Cost of merchandise purchased for resale. • Purchase cost, shipping fees, taxes, etc. • Purchased $1,200 of merchandise on credit • Merchandise inventory 1,200 • Accounts payable 1,200
When a manufacturer or wholesaler prepares a catalog of items it has for sale, it usually gives each item a list price. Trade discount An item’s intended selling price equals list price minus a given percent. Purchase discounts Cash discount on the list price Trade Discount
Terms • Credit terms • For a purchase include the amounts and timing of payments from a buyer to a seller • EOM • End of month
Purchase Discount • Credit terms: 2/10, n/30 • 2% discount within 10 days • Full amount in 30 days • Purchased merchandise on credit $3,000 Merchandise inventory 3,000 Accounts payable 3,000
Purchase Discount • Paid the prior purchase within the discount period. • Gross invoice: $3,000 • 2% discount 60 • Net to be paid 2,940
Purchase discount • Accounts payable 3,000 • Merchandise inventory 60 • Cash 2940 • Reduction in merchandise inventory to reflect the true cost.
Example 2: • Purchased merchandise on account $5,000, terms 1/10, n/60. • Record the payment within the discount period
Example 2 • Merchandise inventory 5,000 • Accounts payable 5,000 • Invoice 5,000 • Discount 50 • Net of invoice 4,950
Example 2 • Accounts payable 5,000 • Merchandise inventory 50 • Cash 4950
Purchases Returns & Allowances • Refers to merchandise a buyer acquires but then returns to the seller. • Allowance is a reduction in price for defective merchandise
Purchase returns • Global returns merchandise worth $500 and purchased on account. • Accounts payable 500 • Merchandise inventory 500
Transportation Costs • FOB • Which determines who pays transportation costs • Shipping point • Means the buyer accepts ownership when the goods depart the seller’s place of business.
Transportation Costs • Destination • Means ownership of goods transfer to the buyer when the goods arrive at the buyer’s place of business.
Transportation Cost • Mackey purchases merchandise FOB shipping point. Transportation costs of $75 paid cash • Merchandise inventory 75 • Cash 75
Sales of Merchandise • Each sales transaction for a seller of merchandise involves two parts. • Revenue • Cost of goods sold
Sales of Merchandise • Cost of goods sold • Records the cost of the goods sold. • Expense account • Reduces the balance in the inventory account • Sales • Revenue account
Entry for Sales • Sold merchandise on credit for $2,400. Merchandise had a cost of $1,600 • Accounts receivable 2,400 • Sales 2,400 • Cost of goods sold 1,600 • Merchandise inventory 1,600
Example 3 • Mary sold merchandise on account for $5,000 with a cost of $2,000. Record the entries for the sale.
Example 3 • Accts receivable 5,000 • Sales 5,000 • Cost of goods sold 2,000 • Merchandise inventory 2,000
Sales Discount • Reduction in the price of the good for early payment • Expense account
Sales Discount • Suppose that merchandise is sold for $5,000 with terms 2/10, n30. Cost of $2,500. Record the sale • Accts receivable 5,000 • Sales 5,000 • Cost of goods sold 2,500 • Merchandise inventory 2,500
Sales Discount • Record the payment within the discount period • Sales 5,000 • Discount 2% 100 • Net price 4,900
Sales Discount • Cash 4,900 • Sales discount 100 • Accounts receivable 5,000
Example 4 • Suppose that merchandise sold on account for $6,000 terms 1/15, n/30. Record the payment within the discount period.
Example 4 • Sales 6,000 • Discount 1% 60 • Net 5,940 • Cash 5,940 • Sales discount 60 • Accts receivable 6,000
Sales Returns & Allowances • Returns: refer to merchandise that customers return to the seller after sale • Allowances – reductions in price of the merchandise sold to customers
Sales Returns & Allowances • Contra revenue account • Increases with a debit • Suppose that merchandise sold for $3,000 with cost of $1,600 is returned. • Sales Returns 3,000 • Accounts receivable 3,000 • Merchandise inventory 1,600 • Cost of goods sold 1.600
Homework • Purchases • EX 4-1, 4-5 • Sales • Ex 4-2, 4-4, 4-6, 4-7 • Buyer/Seller • Ex 4-2, 4-6 • Revenues • Ex 4-9